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Steps to Work Out Your ETF ‘Core’


While getting hyped about the next great investment idea and chasing after potentially lucrative plays can be fun, investors should remember to stick to the basics with core portfolio holdings. ETFs are great for working the core.

“Without a solid core, you are doomed to underachieve because you don’t have the right balance needed to attain your goals,” David Fabian, Chief Operations Officer and Managing Partner of Fabian Capital Managed, said on TheStreet. ”By starting from the ground up using concrete core holdings, you can add additional tactical positions from which to enhance your returns. That way you will have a well-rounded portfolio strategy that is easy to understand.”

Core holdings typically provide investors with large, diversified and liquid exposure to a broad index or market segment. Depending on prevailing market conditions, a core holding can make up anywhere between 40% to 60% of an overall investment portfolio.

With one ETF, investors can easily gain exposure to a diverse basket of securities. Moreover, ETFs are transparent, low-cost, easy to trade and tax efficient.

For instance, Fabian points out a couple of broad, “plain vanilla” positions that provide diversified exposure to large markets, including SPDR S&P 500 ETF (SPY) , Vanguard Total Stock Market ETF (VTI) , iShares MSCI EAFE ETF (EFA) and iShares Aggregate Bond Fund (AGG) . Moreover, BlackRock’s iShares has a line of 10 “Core” ETFs that can also serve as core positions in an investment portfolio.

Along with these plain vanilla, beta index ETFs, investors can also utilize alternative indexing methodologies for core positions.

For example, the Guggenheim S&P 500 Equal Weight ETF (RSP) equally weights S&P 500 components, which also makes the fund lean toward smaller stocks. The equal weight strategy has also helped RSP outperform SPY by over 6% this year.

The PowerShares S&P International Developed Low Volatility Portfolio (IDLV) or the iShares MSCI U.S. Minimum Volatility ETF (USMV) also track broad markets, but they select components that show low volatility. Low-volatility funds hold up better in a market correction, but the strategy could underperform during rallies.

The iShares Select Dividend ETF (DVY) and the First Trust Nasdaq Technology Dividend Index (TDIV) screen for dividend-paying stocks with high yields. Dividends can help investors generate greater total returns over the long-term.

For more information on ETFs, visit our ETF 101 category.

Max Chen contributed to this article.

Full disclosure: Tom Lydon’s clients own SPY and EFA.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.